Cardano Is in Bad Shape, Here’s Why

Cardano - Cardano Is in Bad Shape, Here’s Why

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I did a quick correlation matrix this morning and discovered that Cardano (ADA-USD) exhibits a 0.86 correlation with Invesco’s NASDAQ 100 ETF (NASDAQ:QQQM). This implies that its diversification benefits have eroded. ADA’s been a popular concept among decentralized finance (DeFi) investors due to its functionality as an evidence-based peer-to-peer concept. Yet, we’ve seen a drift in the asset’s investment profile as it has traversed into a more mature investment product. In recent times, Cardano has aligned with high-risk technology stocks, which is a far cry from its initial “hedge against the system” type of investment.

Cardano’s risk-return profile has changed quite a bit since it gained prominence a few years ago. ADA’s returns have underperformed the Nasdaq 100 by more than 10% at a standard deviation of 5.44, indicating that most market participants have lost their faith in the cryptocurrency’s prospects. Furthermore, Cardano has a Sharpe Ratio of -0.0026, meaning that its expected returns are subdued relative to the financial market’s total risk.

I also looked at Cardano from a qualitative vantage point to see whether I could find a few positives, but sadly I didn’t. If Cardano’s correlation to the Nasdaq holds, we’ll likely see systemic headwinds get the better of it. This is purely because of the economic environment, which is arguably in danger of stagflation. Cardano will most likely lose its appeal for the foreseeable future as investors tend to divest from risky assets during turbulent economic environments.

Some investors will probably buy the dip on Cardano after its recent pullback, but I’m encouraging my readers to avoid the hype around short-term spikes in ADA-USD’s price. Remember that the influencing variables of an asset’s price change constantly, meaning that the factors that caused Cardano’s market capitalization to reach more than $35 billion are likely obsolete by now. As I’ve explained throughout the article, ADA’s current value drivers are poorly aligned, suggesting that the cryptocurrency is set for a sustained drawdown.

On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Steve co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London and is working towards his Ph.D. in Finance, in which he’s attempting to challenge the renowned Fama-French 5-factor pricing model by incorporating ESG factors. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, cryptocurrencies, crowdfunding, and ETFs.


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